Is hiring employees from the welfare rolls worthwhile? Yes. Is it easy? No

Craig Hoekenga's memories of the public hearing are vivid and painful. In the summer of 1995, Hoekenga was preparing to move his growing circuit-board company, Microboard Processing Inc. (MPI), from Stratford, Conn., to a larger building in nearby Trumbull. He thought the hearing, a public forum for Trumbull's residents, was simply a formality. "The town council welcomed us with open arms," recalls the soft-spoken CEO. But a few of his prospective neighbors felt otherwise. One woman took the floor and asked pointedly, "Are you going to allow your employees to go outside during break times and lunch?" Hoekenga thought she was joking. "Well of course we will," he responded lightheartedly. The woman burst into tears. "I'm afraid for my children," she cried. Later, another resident cornered Hoekenga and threatened to use every means at his disposal to prevent MPI from moving to town. "You won't need to," Hoekenga said. He had abandoned his plans to relocate to Trumbull, sadly concluding, "Either the door is open, or it's closed."

Hoekenga's own door is clearly open. Over the past 12 years the CEO has gone out of his way to hire people that most company owners wouldn't even interview: former welfare recipients, convicted felons, and recovering drug addicts. Some of his employees fit into all three categories, provoking the kind of "not in my backyard" resistance that Hoekenga encountered in Trumbull. Indeed, he has battled the same attitude within his company. "When I first proposed hiring welfare recipients, the staff didn't support it," he says. "It wasn't that they didn't think it was worthwhile. They just thought that in a competitive marketplace, it would drain our organization."

That was back in 1988, when MPI was a five-year-old company with 50 employees and $2.5 million in revenues. Then, Hoekenga was simply trying to do the right thing, as he is now, and he forged ahead in spite of the protests. But as it turns out, his commitment to hiring people with troubled backgrounds also makes good business sense. At a time when Connecticut's unemployment rate is at its lowest in 10 years, the now-$35-million company has tapped a reliable pipeline of well-trained entry-level workers.

Hoekenga is doing exactly what President Clinton had in mind in 1996, when he signed the Personal Responsibility and Work Opportunity Reconciliation Act. That piece of legislation is aimed at moving welfare recipients into the workforce by imposing strict time limits on the public assistance they can receive and by shifting power and money to the states to create back-to-work and training programs. But among small-business owners, Hoekenga is in the minority. The Welfare to Work Partnership, a national group comprising 12,000 businesses, reports that 30% of the members with fewer than 250 employees have yet to hire their first former welfare recipient, compared with only 10% of the large companies that are members. And a recent survey conducted by the Florida State Wages Board and the National Federation of Independent Business showed that while employers said they believed in hiring former welfare recipients, only 25% of respondents had in fact knowingly done so. "Small businesses need more help getting started," says Eli Segal, president and CEO of the Welfare to Work Partnership. "They may not know how to access government, and they often don't have the resources to partner with job-training organizations."

But trouble getting started isn't the only thing holding small companies at bay. There's also trepidation -- some of it justified. People freshly off the welfare rolls sometimes overwhelm bare-bones human-resources departments. Difficulty securing transportation and child care may result in employee tardiness or absenteeism, which can take a big toll on small organizations. Add to the equation a mountain of paperwork imposed on those businesses by government agencies, and it's hard to imagine why any employer would choose to wade into these waters.

Yet some do, and in many cases their companies are stronger for it. The employers who are most successful, experts say, go into the situation with their eyes wide open and form partnerships with community-based organizations, or CBOs. Hoekenga works with a local nonprofit CBO, for example, that trains people who are on public assistance and places them in jobs. The CEO certainly considers MPI a success story: over the past nine years it has hired more than 30 former welfare recipients and promoted half a dozen of them to supervisory positions. And although Hoekenga has endured his share of difficulties in the process, he's well aware that his trials pale in comparison with those of his employees, some of whom have known extreme poverty, drug addiction, and domestic violence.

Admittedly, such histories take a toll on worker performance. MPI's retention rate for former welfare recipients is just 50%, compared with 80% for employees from more stable backgrounds. "They bring so many problems with them," says Hoekenga. "Outside influences like abusive boyfriends or drugs can drag them back into the pit they were in before they came here." Hoekenga hopes to raise the retention rate among his welfare-to-work employees to 75% by hiring them directly from Training, Education and Manpower (TEAM), the Derby, Conn., social-services agency with which he has developed a customized training program. The program runs for 8 to 10 weeks and covers basic workplace skills as well as specific subjects, such as an electronics-industry quality standard. Hoekenga has pledged to hire 20 people from TEAM over the next year.

But job preparedness is only part of the problem. Welfare recipients segueing into the workforce must cope not only with new demands and new situations but also with the remnants of an old bureaucracy that seems designed to make them fail.

Take Maria Ayala, her sister-in-law Carmen Ayala, and Alice Collins, members of the first class of TEAM/MPI trainees who now have jobs on MPI's production floor and have all recently received promotions and raises. The three qualify for state health-care and child-care assistance for two more years, but in order to get it they often have to interrupt their workdays with trips or phone calls to various agencies. Maria Ayala recently had to miss work, for instance, to attend a child-care-reimbursement hearing. And Collins, a single mother of four who has been on and off welfare since 1985, must frequently call social-service agencies from the office. "Every week, it's something different," she complains. "And if you don't have your paperwork done, they'll cut you off."

Those on the other side of the system agree that the process is unnecessarily onerous. "When you start peeling away the layers of the onion, you begin to cry," says Mary Hoppe, a spokesperson for the Florida State Wages Board. "When you look at some of the transitional benefits and what's required for people to access them, it's absolutely ludicrous. To get a free bus pass, you might have to leave work in the middle of the day, take a bus to your local social-services office, wait in line, then take the bus back to work. It isn't work friendly to the employee or the employer."

For small-company executives, the "procedural roadblocks" that Hoppe describes are exasperating. Time spent by employees running bureaucracy-related errands is time that isn't spent on the job. TCA Fulfillment Service, a $1.2-million telemarketing and fulfillment company in New Rochelle, N.Y., employs 30 former welfare recipients as entry-level data processors and in customer service. Those who are still eligible for medical, housing, and food assistance often take off a morning or an entire day to meet with caseworkers. "It's like social services doesn't really care if they have a job," TCA vice-president Lynn Giordano says. Then there's the paperwork that gets piled on the company executive herself. "I'm always writing letters to various agencies saying that they work here, how much they make, and how many hours they've worked," Giordano says. "It's a mountain of paperwork, and it's redundant. People who haven't worked here in two years still send me forms to fill out."

Even so, she says, "for the people I have now, it's all worth it, because they're so good. They're reliable and dependable, and they fit in very well." As she ramps up her company, Giordano continues to tap Opportunity America, a private employment agency that specializes in training and placing welfare recipients. Like many of its nonprofit counterparts, Opportunity America receives government contracts to find jobs for welfare recipients. Giordano pays nothing, so she saves on recruitment. And since Opportunity America takes just part of its fee up front and the rest in two installments after three and six months' retention, she knows that the agency will do everything in its power to keep people on the job. "I talk to the people at Opportunity America at least three times a week," she says. "I get advice on how to handle behavioral and attitude problems, and I know they'd intervene if I asked them to."

Welfare recipients segueing into the workforce must cope with the remnants of an old bureaucracy that seems designed to make them fail.

More prevalent than companies like Opportunity America are the community-based organizations that not only train and place welfare recipients but also provide case management and sometimes serve as quasi human-resources departments for the companies that hire from them. Frank Tucker has been drawing on CBOs for three years to staff Tucker Technology Inc., his $5-million telecommunications company with headquarters in Oakland, Calif. The CEO hires former welfare recipients on a project-by-project basis, putting them to work mainly pulling cable. "I learned the hard way," Tucker says. "I used to just run an ad or go to the employment-development office in whatever city I was working in. If I hired 10 people, on the first day there were two no-shows. The first Monday, I'd lose another two. And after the first paycheck, I'd lose another two to three. The turnover was killing us."

The CBOs funnel to Tucker candidates he can trust: people who have passed drug tests and showed up consistently for several weeks of job-readiness training. The programs also help new employees organize car pools or map out public-transportation routes. And they keep the pressure on. Tucker calls the organizations, for instance, when his employees don't show up or if they routinely call in sick. "It's less of a strain on our human-resources department to go through the CBOs. I'm going to hire more from this pool," says Tucker, who plans to grow his business by more than 50% this year.

He's not alone when it comes to relying on CBOs. The Welfare to Work Partnership reports that 48% of the members who hired at least one former welfare recipient in 1999 sought help from a CBO, up from 25% in 1998. "If companies try to do this themselves, they'll fail," says partnership president Segal. "This is a big problem for small companies, and they must form partnerships with nonprofits."

That's not always as easy as it sounds. Most nonprofits are accustomed to treating the former welfare recipient, not the employer, as the customer, says Florida's Hoppe. "You took a lot of folks working in social services, and you said, 'OK, now employers are the customer, and you have to market to them. You have to be efficient in how you respond to their needs,' " she says. "Well, it hasn't happened overnight. It's like dismantling the Soviet Union." In addition, many entrepreneurs are suspicious of anything that smacks of government interference. But Segal cautions against minimizing the public sector's role. "Many people no longer on welfare rolls are still entitled to Medicaid and food stamps," he says, and consequently they still have one foot in the system.

Companies that sidestep the government are also sidestepping attractive government subsidies, Segal points out. (See "Credit Where Credit Is Due," below.) But small-business owners aren't exactly crying in their beer over that loss. The Welfare to Work Partnership reports that only 12% of its member companies with fewer than 50 employees use the federal government's Work Opportunity Tax Credit (WOTC), compared with 48% of companies with more than 3,000 employees. Several CEOs interviewed for this article didn't know the credit existed, and most that did assumed that applying for it would be a bureaucratic nightmare. "The government is a big pain in the tail," grouses Tucker, echoing the sentiments of many. "Their credits don't turn me on."

Not everyone is so dismissive of public subsidies. Take Mike Malloy, for example. A police sergeant currently on disability leave, Malloy has consistently recruited from the welfare rolls since founding his Providence, R.I., security and investigative company, NESCTC, three years ago. More than half of his 40 employees and close to a third of his management staff are former welfare recipients. The state of Rhode Island, which some say has one of the nation's most progressive and generous welfare-to-work programs, gives Malloy an hourly-wage subsidy of $2.50 for each former welfare recipient he employs, for the first six months' of that worker's employment. Malloy also collects a Work Opportunity Tax Credit of $2,000 for each one who lasts a year. "I take that money, and I use it for training," says Malloy. "And that's what gives me a market edge."

Without the subsidy and the tax credit, Malloy says, he'd be forced to take the standard industry approach to training, which he describes as "show them a 20-minute video and put them in a uniform." Instead, Malloy requires every employee to complete 55 hours of a security curriculum that he designed and to earn a grade of at least 70% in each of 14 courses. Those who pass receive an additional 25 hours of customer-service training, which Malloy contracts out. In recognition of such efforts, the NESCTC CEO was named Welfare to Work Small Business Owner Associate of the Year.

The majority of NESCTC's employees hail from Rhode Island's RIte Works Employment and Retention Services office in Cranston. Malloy describes its director, June Allen, as a "savior in tight labor times. When I'm competing for a contract, I might say to June, 'I'm going to need 10 of your people, fast,' " he says. "It allows me to be more competitive." Allen's office runs customized training programs, provides case management, and helps Malloy's new employees find transportation and child care. "She calls in personally to check on them," says Malloy, "to make sure they're living up to our expectations."

Malloy, too, goes out of his way to help former welfare recipients solve the personal problems that tend to gum up their productivity. One such problem was providing care for the children of single mothers who work the night shift. Malloy's solution was ingenious. "He has a security contract with one of the public-housing authorities," says Allen. "So he approached some elderly women, the mothers of his employees who live there, and arranged for them to become child-care providers whom we can then pay under our child-care subsidy program." To alleviate another difficulty, Malloy routinely sends supervisors to pick up employees with transportation problems. Is it too much hand-holding? "If we wanted high turnover," he reasons, "we could just close our eyes."

Malloy's experience is the rule: most CEOs committed to hiring former welfare recipients learn to make allowances. How other employees react to those allowances is unpredictable. At NESCTC, staff members are thrilled that the welfare-to-work folks bring training dollars into the company, money that benefits everyone. Conditions are less harmonious, however, at Studio 904 Inc., an $870,000 hair salon in Seattle. President and founder Kay Hirai says that the special arrangements she's made for her welfare-to-work employees have concerned other staff members. "I had someone say to me that it's a distraction to have these people around, that it might seem that the disadvantaged people have more advantages," says Hirai, who has hired 14 former welfare recipients in four years. (Only 3 remain.)

"This isn't just about employing people," says Hirai. "It's about me being their advocate." The company owner has, for example, helped former welfare recipients get into cosmetology school, provided them with special on-the-job training, and frequently allowed them time out of the workday to make court appearances or to look for housing. "Because I want them to succeed, it began to look to other employees that they were getting more," she says. "But if my other employees came to me with problems, I would help them too."

Indeed, CEOs who hire from the welfare rolls are careful to distinguish between a second chance and a free ride. Hoekenga grants welfare-to-work employees a six-month grace period, during which tardiness and productivity issues are dealt with gently. After six months, those workers are treated like everyone else and held to the company's "three strikes and you're out" rule: Anyone who is habitually late, absent, or unproductive is fired.

Others believe that any preferential treatment is a mistake. Scott Hauge, CEO of CAL Insurance, in San Francisco, recalls that one of his welfare-to-work employees took what added up to 27 days of sick leave in her first year at the company. "It was so disruptive that we finally had to release her," says Hauge, who admits he had let the situation get out of hand. "Our first lesson was, whomever you hire, let the standard of the company apply to everyone. You don't lower your standard. You don't allow a person to not show up for 27 days. That was absurd." Hauge says he did another welfare-to-work employee a disservice by promoting her too soon. "It was done in good faith, but we made a mistake by promoting her beyond her capabilities," he recalls. "She ended up leaving."

The promotion may have been a mistake, but it was committed for a good reason. Although many former welfare recipients bring transitional benefits to their jobs, the clock is always ticking. "What happens at the end of two years, when they don't get subsidies for transportation, health care, and child care?" Hauge asks. "They won't be able to live unless they've moved up the wage scale." A dead-end job can be a ticket back to public assistance, he says. And that would leave him back where he started: recruiting yet another employee for an entry-level position.

The situation grows thornier as the best-qualified people are snatched up, leaving companies to recruit from a population designated by welfare case workers as "hardest to serve." "Many people are not in a position to work," says Peter Edelman, a professor of law at Georgetown University Law Center and former assistant secretary for planning and evaluation at the Department of Health and Human Services. "They've got chronically ill children, or they're caring for an infirm relative. Then you have people with depression, drug and alcohol problems, and domestic-violence issues." Such cases account for many of the 40% of former welfare recipients who have left the rolls but don't have jobs. Edelman calls them "America's disappeared."

Implementing traditional means of job placement for those people is like "trying to chop a tree down with a hammer," says Rob Franciose, co-owner of ETI Managed Work Services, in Portland, Maine. Franciose and two partners founded the company in 1993 as a private-placement agency for people with disabilities and soon expanded their services to include welfare recipients. Companies outsource jobs -- or entire departments -- to ETI, and ETI fills those positions with its contractors. The outsourced jobs, generally low-wage, entry-level positions, are intended as transitional employment. "There's a site manager and job coaches who train people and work with them on self-confidence and job development," says Franciose. "In essence, it's a school, but you work." Employees remain at the company until they're ready for more permanent employment. Twenty percent end up working for the host companies.

"It's a very important source of stable employees," says Peter Wiberg, a human-resources representative at the Portland division of EM Solutions, a $100-million maker of computer cabinets and an ETI customer for three years. Depending on its needs, the Portland division fills 10 to 15 positions with ETI workers and deploys three coaches on-site. "They bill us per unit produced, plus an administrative fee," says Wiberg. "We don't have to deal with turnover or workers' compensation or health insurance." A dozen ETI employees have joined EM Solutions full-time. "They're very loyal and hardworking," Wiberg says.

"We want our best employees to leave," says Franciose, who puts the permanent-placement and retention rates for workers who "graduate" from ETI at about 80%. That success has attracted national attention: recently, the company was hired by the Enterprise Foundation, a nonprofit founded in 1982 by the late real estate developer James Rouse and his wife, Patty, to help duplicate its model in Baltimore; Washington, D.C.; St. Louis; East Palo Alto, Calif.; and San Antonio.

Companies like ETI will likely prosper as low unemployment continues to draw harder cases into the workforce. But if the economy goes south, demand for even the most employable welfare recipients is bound to drop. "If I can go out and get a bunch of seasoned workers because supply and demand has shifted, I'm going to cherry-pick and take the best," says Frank Tucker bluntly. "I might take some welfare-to-work people to help the community, but I won't do it at the level I'm doing it now."

Tucker says the only way to keep welfare-to-workers working is to make them "the best" at what they do. Toward that end he recently sent 20 employees to a training program where they earned advanced industry certification and, subsequently, higher wages. "We have a window of opportunity now to help these workers," Tucker says. "We have to get these people in at the entry level so that they become the highest skilled and most in-demand workers even when the economy softens."

That attitude is not unexpected from someone who once served as a social worker at Rikers Island. But Tucker scoffs at any suggestion that his actions are prodded only by a do-gooder's agenda. "It's just a smart investment," he says.

"When my venture capitalist first heard our business plan, he wanted to vomit," recalls David Henry, CEO of Allegheny Child Care Academy. But the idea that turned stomachs is now turning heads. Founded in 1992, Henry's company operates 19 inner-city day-care centers serving welfare recipients and other low-income customers. The CEO expects his $8.5-million business to double in revenues this year, as it expands from its bases in Pittsburgh and Philadelphia into Detroit and Cleveland.

Allegheny's competitive edge is its nontraditional workforce: more than 25% of employees are themselves former welfare recipients. "We enjoy what we do socially," says Henry. "But we're not philanthropists. We have venture capitalists backing us, and the business model has to work." And the model does work, largely because the company's decision to target inner cities gave it access to a vast labor pool. Working with a private welfare-to-work training and consulting agency called Educational Data Systems Inc. (EDSI), Henry hired 100 former welfare recipients last year, mostly as teaching assistants and aides. "Day care is a very regional business, so it makes sense for us to hire from the community," he says. Allegheny's employees work close to home, so they're not saddled with transportation costs. And the close match between workplace and neighborhood demographics makes the company especially inviting.

Unlike many small-company CEOs, Henry takes full advantage of the financial benefits that come with welfare-to-work employees. The federal Work Opportunity Tax Credit amounts to $5,000 over two years for each qualifying employee; those workers also earn the company $3,000 each from Pennsylvania's Employment Incentive Payment Program. Then there's the 50% cash reimbursement Henry gets on qualifying workers' salaries during their first three months of employment, courtesy of the Greater Philadelphia Private Industry Council.

Acknowledging that his workforce is high maintenance, Henry hired in December a regional human-resources manager who serves the welfare-to-work employees exclusively. "If a case worker calls and demands to see someone in the middle of the day, the manager will arrange a time to speak that is convenient to both the agency and the employee," explains Henry. "She'll also make sure that employees file their state-required health forms every year and are aware of all the transitional benefits available to them through the state."

Like Frank Tucker, CEO of Tucker Technology, Henry views his welfare-to-work employees as an investment. By the end of the year he will have enrolled 20 or so in Project Teach, an accelerated state training program that awards child-care workers with degrees. "Through the program, they can grow in three to four years into a supervisory role," says Henry. "So we're building our own workforce."

Credit Where Credit Is Due

Financial incentives for employing welfare recipients are not proving to be the big juicy carrots that state and federal governments had expected them to be. Still, a tax break is a tax break, and the following federal enticements are offered to company owners who hire from the welfare rolls:

THE WORK OPPORTUNITY TAX CREDIT is available to companies that hire from one or more target groups. The groups include those who received Temporary Assistance to Needy Families (TANF) for 9 of the past 18 months; veterans who received food stamps for 3 of the past 15 months; and individuals aged 18 to 24 whose families received food stamps for 3 of the past 5 months but who are no longer eligible for them. Qualifying companies get a tax credit equal to either 25% or 40% of each employee's first $6,000 in wages, depending upon hours worked.

THE WELFARE TO WORK TAX CREDIT covers employees who have received TANF for at least the past 18 months or who are no longer eligible for TANF because they have exceeded the time limits. Companies that give these people at least 400 hours of work each year receive a credit equal to 35% of those employees' first $10,000 in wages in year one; and 50% of the first $10,000 in year two.

Company owners can claim one or the other federal credit but not both. And since this is the government, business owners naturally must file the appropriate form, in this case the pithily named Pre-Screening Notice and Certification Request for the Work Opportunity and Welfare-to-Work Credits (or, as its friends call it, Form 8850). "The form must, without exception, be in the hands of your state WOTC coordinator within 21 days of when the person starts work," warns Steve Tennies, managing director of SMS Tax Incentive Group and executive vice-president of SMS Management Services, Atlanta consulting firms that help companies apply for the credits. States and communities may have their own sweeteners, says Tennies, including property-tax abatements, reduced utility rates, or sales- and use-tax exemptions. He recommends that CEOs check with their states' departments of commerce or departments of economic development. Members of the Welfare to Work Partnership can tap another resource: free advice on tax credits from four consulting firms.